Darshan's Blog

Darshan's Daily Market Ponderings

Friday 29th January, 2010

US GDP grows by an annualised 5.7%...but....

Afternoon all

At the moment the markets and in particular the forex markets are going insane after the 4th quarter GDP figures from the USA. The economy grew at a better than forecasted 5.7% annualized pace in the fourth quarter.

You would think this would send the markets moonshot upwards BUT no. Why? Well the question everyone now has is:

If things are so great, then why are the FOMC even debating stimulus and surely rates can go up quicker?

This in turn means the banks relying on the cheap funds to pump all the asset classes, are getting nervous. You see Mr Government - eventually all lies catch up with you. This number looks great right?

Well with Bernanke getting voted into for his second term (with a 70-30 Senate Vote last night) - all eyes will be on Papa Smurf to deliver the magic to Wall Street. Let's see how he plays this mess.

I mean for all his cries of "If you I don't stay as Chairman, the economy will be in trouble" - he now looks like silly doesn't he. 5.7% is a big number. That's the fastest pace of growth in six years for the USA. I can see him calling up the Commerce Department and saying "You idiots, if you're going to fudge the figures - at least make them believable and give me enough room to play with!". Although knowing him, he'll have probably called the wrong phone number.

So even if we are to believe this fairytale number...where did the growth come from? Was it from consumer spending or business investment? No - that remained stagnant. According to the Commerce Department, two-thirds of the number came from an increase in inventories. Which of course means capacity is being upped. Wait a second - consumer spending and business investment was less than a portion of remaining one-third - so - why the swing in inventories? How does that work? Oh that's right - the swing in inventories from government spending and projects. Makes sense now.

It's a bizarre world - in the USA - the government pumps up the GDP with intervention. In the UK - the government tries to pump up the GDP but it can't - as it can't spend anymore. In Europe - they pump up the GDP with stimulus but soon as that ends (eg car scrappage in Germany) they see problems and wild negative swings in aggregate demand - but the media just ignores it. Can nobody lie properly?

Just remember that only last night - the Senate upped the US debt ceiling to $14.3 trillion - up another $1.9T. That's $45,000 for each American. That's the price you pay for that sort of GDP number - if you're willing to accept that - then more fool you.

Remember - what I said yesterday - politics and money first, people second. Don't accept these figures - they mean nothing. Anyway talking about meaning nothing, back to the markets.

Yesterday was volatile to the max! We got the level we wanted but there was quick spike underneath. If you bought at 10100 again - you could close out now for 91 points profit and reassess later. The dollar is shooting north too. However, I still think we are close to reversals on everything. So from here, we could still get down to 10000 or 9950 and then we head up for a few days before collapsing again, or we just keep rising from today onwards.

You just have to be nimble and look at all the clues. To me - gold still wants lower - remember if you'd shorted a few weeks back like I said - you would now be profiting from the $80 drop since then. If you took the AUD/USD short from the beginning of the week - you should be 200 pips in profit right now and locked in with a trailing stop. So because I think all of those anti-dollar currencies and instruments need lower but they are all due a technical bounce. So the market could rise a bit from here but the market should not rise too much before heading back down. The bear trap might have to wait until next week now. Monday should be interesting with new month money flows. We shall see.

For today - I would stay out of the market until the signals become clearer. Don't try to be a hero. It's been a good week ofprofits - Fridays have a habit of taking those back.

Happy relaxing and trading if you must.

Darshan

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